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Customers are paying more to maintain a checking account and withdraw cash from an out-of-system ATM, and when they bounce a check. To make up for declining revenue, many banks are boosting fees and are requiring higher minimum balances for many accounts.
The institutions also have made it easier for customers to spend more than is in their accounts -- and then hit them with substantial fees, a practice so vexing to consumer advocates that the Federal Reserve is thinking of regulating it.
Bank revenue has plummeted on the back of foreclosures and rising credit card delinquencies. Now Congress has passed a law cracking down on arbitrary and excessive credit card fees. So the banks have been fighting back.
"There is an economic storm that has made revenue fall," said Michael Moebs, an economist and chief executive of Moebs Services, an economic research firm in Lake Bluff, Ill. "Fee income is basically where banks and credit unions can offset both loan- and investment-related losses."
Bank of America this year raised the maximum number of times customers can get hit with overdraft fees from five a day to 10. On top of that, it began charging a one-time fee of $35 if the account remains in the negative for more than five days. The bank also raised the monthly fee on My Access checking accounts to $8.95 from $5.95. Citigroup's Citibank last year increased its overdraft fee to $34 from $30 and its ATM fees for non-Citibank customers to $3 from $2. Wells Fargo also last year increased its maximum overdraft and insufficient funds fee to $35 from $34.
"The most consistent increases have been seen on punitive-type fees such as bounced check charges and ATM fees, and those are the two categories of fees that are easiest to avoid," said Greg McBride, senior financial analyst for Bankrate.com, which tracks the banking industry.
In a study of fees last year, Bankrate.com found that the average bounced check fee rose 2.5 percent from 2007 to nearly $30. The average ATM surcharge in 2008 was up more than 10 percent to almost $2. To avoid monthly fees on accounts that pay interest, customers had to maintain an average of $3,461.84 in their checking accounts, up 4 percent from the year before.
Banking officials said they are simply reacting to market forces.
"I think when you look at the whole -- all of the fees overall -- the landscape has changed and that has meant rising costs for our industry," said Anne Pace, a spokeswoman for Bank of America. "For the bank to continue offering competitive products and services, and making sure we are lending responsibly in the current environment, we have to adjust our prices."
She added that in some cases, the bank changes have favored consumers. For instance, she said, the bank reduced the overdraft fee to $10 an item if overdrafts in a day total $5 or less.
Overdraft fees have become an important source of income for banks. Years ago, banks rarely approved point-of-sale debit transactions when the money to cover the cost was not available in the customer's account. The overdraft fee was used primarily as a penalty to keep customers from spending more than they had. Then they became too profitable for banks not to embrace. A 2008 Federal Deposit Insurance Corp. study found that insufficient funds or overdraft fees made up 74 percent of service charges on deposit accounts.
Moebs Services, which provides data to the federal government, estimates that overdraft revenue will reach $38.5 billion this year. The median overdraft fee will be $27.50 this year, up from $25 last year, Moebs said.
Consumer advocates said overdraft fees are a danger because they can quickly add up and eat into people's available cash when many are mired in debt. Banks too often charge disproportionately for the service, advocates said.
"The purpose of overdraft protection or courtesy overdraft, as it's often called, is to turn something that's like a parking ticket into a profit center," said Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group. "The $4 latte becomes the $39 latte after the $35 fee. Overdraft protection is a misnomer."
Since May, Lori Harris, a Laurel, Md., resident, has been the inadvertent recipient of such protection.
Early last month, she deposited money into her Bank of America checking account, but the check did not clear before several charges were posted.
Each time Harris overdrew her account, she paid $35, totaling nearly $300 in fees in May. That set off a chain of events that has left her with about $600 in overdraft fees this month.
She is now afraid to use her debit card and obsessively checks her account history. She is looking for another bank.
"I simply can't afford that anymore," she said. "I'm going to have to go to a completely cash-based type of lifestyle."
Jean Ann Fox, director of financial services for the Consumer Federation of America, said overdraft programs are often not explained when consumers open accounts, and many don't have opt-out provisions. In a survey of the 16 largest banks, the federation found that all of them charged overdraft fees without the consumer's consent.
"If I were a bank, I wouldn't want to tell you I would charge you $70 for letting you overdraw $20," Fox said.
The Federal Reserve has taken notice and is considering new rules that would crack down on automatic overdraft protection. But consumer advocates said the rules would not go far enough because, for one thing, they would not cap overdraft fees.
Meanwhile, Rep. Carolyn B. Maloney, D-N.Y., who was instrumental in getting the new credit card law passed last month, has proposed a bill that would require banks to notify customers when an ATM or debit card transaction is about to trigger an overdraft fee and give them a chance to decline the service.
But Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, an industry group, said consumers can avoid such fees if they are proactive. That means reading their account contracts to understand specifics of their bank's programs and fees -- and asking questions, he said.
"The key is to take charge of your financial situation and eliminate any uncertainty to avoid gotcha moments," he said.
When there's a choice, advocates suggest people use traditional overdraft protection, where one account is protected by another, instead of using programs in which the bank extends a credit line to cover the overdrafts. Credit received from the bank often takes priority over other bills, because the bank repays itself first once a deposit is made.
Several banks also offer to send customers e-mail and text message alerts when they are close to overdrawing their accounts. But McBride, of Bankrate.com, said consumers can avoid crossing that line by monitoring their accounts online. "You can take a break from Facebook for five minutes and check your available account balance," he said.
As for other fees, McBride said people should shop around for banks or credit unions that do not charge checking account maintenance fees.
To avoid ATM fees, they should discipline themselves to use their own banks' ATMs even if that means walking an extra block.
"The bottom line here is: It's not having to cough up three or four bucks every once in a while that's the problem," he said. "It's doing it routinely week in and week out. That's the type of financial habit that will put you in the poorhouse."
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